NEW YORK, JULY 25, 2008
(STAR) Oil prices shed nearly $4 Wednesday, tumbling below $125 a barrel for the first time since early June on growing fears that high prices and the weak US economy are destroying demand.

Light, sweet crude for September delivery dropped $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange. The August contract expired Tuesday at $127.95.

A weekly report by the Energy Department’s Energy Information Administration offered further evidence that cash-strapped Americans are cutting back on fuel. Demand for gasoline over the four weeks ending July 18 was 2.4 percent lower than a year earlier, averaging more than 9.3 million barrels a day.

The drop in gas demand was echoed in a report from the Federal Reserve on regional economic conditions that showed the US mired in sluggish economic growth and rising prices.

The Energy Department report showed that gasoline stockpiles jumped by 2.9 million barrels last week, far more than analysts surveyed by energy research firm Platts predicted. The decline in crude inventories was less than forecast.

None of those figures gave traders – who until recently seemed more focused on supply threats than shrinking demand – reason to begin buying again.

“The market appears heavily concentrated on demand numbers all of a sudden,” said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. “These numbers continue to show big-time depreciation in gasoline demand.”

Oil prices came under further pressure as the dollar strengthened against the euro, giving investors less reason to seek haven in commodities as a hedge against inflation and a weakening US currency.

Meanwhile, concerns that Hurricane Dolly might affect US oil and natural gas platforms in the Gulf of Mexico dwindled as it made landfall near South Padre Island in Texas as a Category 2 storm. The Minerals Management Service reported that only about 4.7 percent of production – about 60,000 barrels a day – has been halted because of the storm.

Until recently, traders used almost any perceived threat to supply as a reason to push prices higher. No longer. Oil prices, which marched to a new high above $147 a barrel less than two weeks ago, have now fallen in six of the last seven sessions.

“The market’s letting steam out,” said Mark Pervan, a senior commodities strategist with ANZ Bank in Melbourne. “There’s genuine reason to be taking profits in this market with the weak US demand numbers.”

Analysts said liquidity problems at oil and asphalt transportation and storage provider SemGroup LP may have helped trigger the recent sell-off. A number of the company’s subsidiaries filed for reorganization under Chapter 11 bankruptcy rules in Delaware federal court Tuesday.

In the bankruptcy filing, the Tulsa, Oklahoma-based company described what it called a “severe liquidity crisis” caused by demands for massive amounts of more money from brokers to cover large bets it had amassed on futures and options. Those demands grew increasingly tough to meet as energy prices rose and Wall Street’s credit problems mounted.

On July 16, a day after oil prices began to tumble, the company transferred its trading account and in the process recognized $2.4 billion in losses as it became clear it could not cover its trading positions. Co-founder and former president and CEO Thomas Kivisto owes about $290 million of that total.

“It turns out that the run-up in crude oil prices in June and early July had ... a lot to do with the squeeze on SemGroup’s hedges,” analyst and trader Stephen Schork said. “Now the only question is are there more ‘SemGroups’ lurking in the shadows?”

A threat by Nigeria’s main militant group Wednesday to destroy major pipelines in the oil exporting country within 30 days did little to slow crude’s decline. The group said in an e-mail statement it had not been part of an alleged $12-million payment to militants to protect pipelines.

In other Nymex trading, heating oil futures lost more than 6 cents to trade at $3.6127 a gallon, while gasoline futures shed over 7 cents to $3.0762 a gallon. Natural gas prices fell more than 7 cents to $9.992 per 1,000 cubic feet. – AP

Chief News Editor: Sol Jose Vanzi

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